International taxation - Enforced residency – the impact of the Corona curfew on residency for tax purposes and related issues

In these frenzied days, most of the citizens of the country are under curfew in their homes, following directives or recommendations that have been issued by the Ministry of Health. Furthermore and in light of the circumstances, most business people are now located within the borders of the State of Israel, even though in normal circumstances they are in the habit of staying out of the country for business purposes, whether this be because of the “closing of the borders” and whether because of taking the need to self-quarantine in Israel or abroad, when moving between countries, into account. This applies, inter alia, to foreign residents who have come to Israel and have been forced to stay here “until the storm has passed”. On a broader scale, global economic activity in general, and economic activity in particular have been reduced to the minimum that is necessary in many cases and in certain cases it has even been halted completely.
The question that needs to be asks is how these circumstances may affect questions regarding the residence of an individualin certain cases, the tests for control and management, which are relevant to a company’s residency status, the way in which the calculation of the place where income is produced is performed, including the existence of a permanent institution or the clarification of the Israeli part of “mixed income”, which a new immigrant or a returning veteran resident has, and other issues.
In our opinion, there is room for giving consideration to the publication of general guidance, even of it is subject to the specific circumstances in each individual case, that the current period (“The Corona period”) should be eliminated when considering the impact of the aspects that are mentioned above, whether this be in relation to people who have been required to stay in Israel because of the situation and whether in relation to those who have become “stuck” outside of Israel.

The residency of an individual
1. The presumption of days for the determination or residency:
The provisions of the Income Tax Ordinance in Israel (hereinafter: “The ITO”) determine that there is a positive presumption of Israeli residency,pursuant to which staying for 183 days in a tax year, or a cumulative stay of 425 days in three years ending in the tax year, constitutes a presumption of such residency in Israel. This presumption can be contradicted by the assessee or by the assessing officer. It is obvious that the Corona period may move the scales unjustly in the direction of residence in Israel in many cases.
The provisions of the ITO also determine a positive presumption in relation to foreign residency, pursuant to which staying for 183 days outside of Israel in two consecutive years and the existence of a center of life a life abroad in two consecutive years constitutes a presumption of such foreign residency, as from the first tax year. This presumption is not contradictable. In this case too, because of the Corona period, a different conclusion may be determined that the conclusion that might have been determined in regular times.
The elimination of the Corona period will balance the equation in this connection, both in relation to residency in Israel and also in relation for foreign residency.

2. Days in a stay as part of the clarification of the center of life:
For all matters relating to the center of life (which is the main test for the examination of residency), the issues need to be examined at an objective level, however, consideration should also be given to the assessee’s subjective intention. Thus, insofar as the circumstances of the case indicate a temporary enforced stay by the assessee in Israel (or abroad), then we should try to eliminate that impact insofar as is possible, or it should be given lower weighting in the examination of the center of life.
The following are a number of aspect that are connected to the aforesaid:
– In tax rulings, which have been given by the Israeli Tax Authority (hereinafter: “ITA”) in connection with residency, the days in which the individual stayed in order to nurse a close family member have been eliminated, because of the fact that there has been an external constraint. Therefore, in our opinion, an assessee’s enforced stay for medical reasons and/or because of legal directives should also be eliminated.
– There are tax rulings in which employees in a relocation or other individuals have committed to a maximum period of staying in Israel (between 75 and 90 days) as part of the terms of the decision, in order to be considered to be foreign residents. Furthermore, there are decisions going in the opposite direction, which require a minimal number of days stayed in Israel (142 days) for the purpose or receiving confirmation of residency for tax purposes, for example. It is obvious that an unwilling stay in Israel, or abroad, in the Corona period, may cause the breach of these tax decisions.
– The regulations that have been promulgated under the ITO, enable the elimination of a period of medical hospitalization in Israel, or a period of sickness in Israel, when counting the days stayed for the purpose of testing the center of life. Albeit the Corona period is not “hospitalization” within the literal meaning of the term, and it does not constitute “a sickness” (except for those who are really unlucky), however the rationale that lies behind the elimination this period is of course also relevant to the Corona period.
The attribution of income to Israel in the case of mixed income
A new immigrant (including someone who has returned to Israel after being a foreign resident for at least 10 years), is entitled to an exemption on the income that he produced outside of Israel for a period of ten years from the time of his immigration or return.
For an immigrant who provides services (whether as a salaried employee or as a self-employed person) where they are alternatively in Israel and abroad, the ITA has determined, within the framework of tax decisions and a professional circular, that he must report on the “Israeli” part of the income from that mixed activity.
The ITA accepts and prefers the business days approach for dividing income between the countries, pursuant to which the Israeli part will be calculated in accordance with the number of business days in which the individual stayed in Israel as compared with the number of business days in the year. However, if the circumstances justify this (and with supporting documentation being presented), it is possible to apportion the income differently. In the ruling in the “Yehuda Talmi” case, for example, which deals with the subject, it was stated in the background reasoning that the ITA too accepted and agreed that in certain cases it is possible to multiply the business days in Israel by a particular factor, which typifies a smaller number of work hours, or a lesser economic contribution that those attributed to work done abroad (“The multiplier approach”).
Within the framework of that same professional circular and the tax rulings on the subject, it has been determined that weekends, festivals and holidays should be eliminated within the framework of the calculation of the business days. However, it is not mentioned explicitly that sick days should be eliminated, however it would appear that this is self-evident.
For the case before us – a new immigrant’s enforced stay in Israel will increase the relative part that is attributed to Israel, even though this is a temporary period that lies outside the regular conduct. Accordingly, the elimination of the Corona period (similarly to the elimination that is expected for days of sick leaves generally) will balance the distortion.
If the position that the Corona period should be eliminated in its entirety is not accepted, at the very least, the number of business days in that period should be multiplied by some factor whatsoever, which would reduce the part of the income that is attributed to Israel, because of the fact that the economic activity during the Corona period has in any event been reduced significantly.
Control and management and the permanent establishment issue in activity involving the provision of services

An enforced stay in Israel because of the circumstances that exist, which extends for weeks and maybe even for several months, may lead to the determination of Israeli residency for a company, because of the existence of control and management from Israel, or lead to the existence of an enforced permanent establishment in Israel.

1. Residency of a company
The definition of the term “resident” that appears in the Israeli Tax Ordinance, in relation to a Company, determines that a company (which was incorporated abroad) will be considered as being resident in Israel, if the control and the management of its business are operated from Israel. Thus for example, an officer who is a member of the management of an international company, who is “stuck” in Israel as a result of the Corona crisis and who continues to manage the company as usual, could expose that foreign company to taxation in (on all of its income).
Moreover, the determination of Israeli residence for such a company, even if for a short period of time, may cause the imposition of “exit tax” on the Company, at the time at which the Company ceases to be deemed to be resident in Israel, after the Corona period, and clearly, this is not what the legislator intended.
Our position is that the control and management mechanism in relation to the Company should be examined from a long-term perspective, and no determination regarding the company’s place of residence for tax purposes should not be concluded from a temporary stay in Israel, all the more so as a result of circumstances that are not under the control of the company or its manager.

2. Permanent establishment:
A similar issue arrives in relation to the existence of a permanent establishment in Israel, which may arise because of a senior officer’s stay in Israel, which has been forced by the circumstances and who executes decisions in the Company’s name (such as in the case of the manager in the example that appears above).
In this connection, it can be claimed that because of the temporary nature that the economic presence in Israel in the circumstances that are described above has, it cannot be determined that a permanent establishment arises in Israel for a foreign company. This also fits with the aspect of the determinations that are required for the existence of a permanent establishment in the tax treaties that the State of Israel has signed upon, and if the economic presence in Israel is temporary, all the more so in the circumstances that have been forced upon the project, the requirement in the said determinations is not met.